Rear View Mirror Housing Experts

Mike Morgan at Morgan Florida sent me another update that I can post with
the exception of one small section. This update is called Rear View Mirror
Experts.

Quote of the Week - F, F+, C, F, F+, B, D, F, F, F+ - Bob Toll on
the Toll Brothers Conference Call as he reviewed markets assigning letter
grades. Although this is not the exact order of the markets he rattled off,
we heard a lot more F's than the last time he issued a report card. No more "dancing
on the bottom." No more Kool Aid. He gave it to us loud and clear . . . providing
you listened carefully.

This Week's Update - I've cut this week's update short. No sense
in beating a dead horse. Call me if you would like to discuss specific companies
or markets. Much of the news this week covers areas I have been discussing
for 12-18 months. It's a bit depressing to know you were right, after taking
the heat along the way for being so negative . . . and now to read all about
the very same issues I was discussing a year ago, as if these are brilliant
forms of analysis from leading economists and research analysts. So what's
in the future. More bad news . . . but then I'm sure I'll take more heat
for being so negative again. I'm still hearing comments about how wrong I
am and how isolated these markets are. Bob Toll's comments are a perfect
example. All of those F markets were F markets long before now, and many
of the A,B and C markets are simply NOT. But that's what you get from the
rear view mirror.

Market Conditions - Another week of mini-good tidings . . . I think.
We've seen a second week of increased buyer interest here in Florida, as
well as from other throughout the country. Most of it is coming from traditional
buyers that have school age children. This is a seasonal blip where buyers
are concentrating on purchased to lock in school systems for their children
for the fall. It's certainly not anything to get excited about, but you may
hear a few cheerleaders over the next few weeks. Unfortunately, this market
is a trickle, and it trickles out as we approach the summer months. Moreover,
even though we're seeing traffic, we're not seeing a bump in contracts or
buyers that can get a mortgage.

Seattle - Yessiree, Seattle. My wonderful sister (a famous, carefree,
glass blower in Seattle) and her Microsoft exec hubbie live in the cozy,
comfort of Seattle. They've both boasted, as have most on Wall Street, that
Seattle is in its own little world . . . and all is good. Here's an article
in the Seattle Times called Borrower,
beware: Debt disaster looms as rates rise on easy-money mortgages that
shows you the housing and mortgage issues are everywhere . . . it's just
a matter of time before the infection becomes visible.

I'll be making a trip to Seattle next month for a little more color on real
estate and mortgage issues.

Nationwide - The Washington Post ran a piece about the drop in prices
and buyers in markets as "secure" as the Manhattan commuter areas of Connecticut.
Below you will read a few things about Minneapolis, South Carolina and Georgia.
It's not just a Florida and California problem. For the rear view mirror
drivers, they'll feel the whiplash within the next 2-3 Quarters.

Conference Calls - I'm sure the analysts you work with have provided
you with detailed updates on their models by now. Even though the models
are rear view data, it should start to paint a picture. And if you take the
time to realize how incentives are being buried in other line item areas,
you'll see how prices must continue to fall if inventory is going to drop.
Unfortunately, the builders are still building more inventory than the market
is absorbing. Personally, I didn't hear much to write about on any of the
calls. Toll Brothers is stepping up to the write down buffet table with $90-130
million estimate. I don't think I can stress this issue enough. More on impairments
below, as well as WCI.

Numbers - Tuesday we get the housing index from NAHB and the Commerce
Department reports April housing starts Wednesday. Big deal. I can't say
any of the numbers we've been fed are in touch with ground-zero reality.

NAR now expects sales of previously occupied homes to fall 2.9% this year.
With David Lereah given the boot, maybe NAR will start reporting numbers
that are in touch with reality. (probably not) The 2.9% number is a 31.81%
negative revision in the previous estimate. Almost as bad is the revised-estimate
of new home sales to 864,000 units for 2007. That's a 27.34% negative revision.
Two things to remember when looking at NAR numbers. First, they use a sampling
and we don't get to see what markets are sampled. Second, quite a few Realtor
Boards no longer report numbers. Naples, Florida is a perfect example. They
will no longer share data.

The only way to look to the future, is to get in the car and see ground
zero. I did just that this week. Forget about looking back at numbers that
are unreliable.

I made a road trip to South Carolina this week for interviews with an ABC
and NBC affiliate reporting on defective homes. Along the way I drove by
developments in South Carolina, Georgia and Florida.

I saw an awful lot of very ugly developments with hundreds of millions of
dollars in the ground for horizontal development, but no homes going vertical.
And I saw an awful lot of communities half built . . . with many of the homes
for sale. It's hard to swallow the "we don't build spec homes" garbage we
hear so much on the conference calls. And even if they don't build specs,
when the buyers walk away, the builders now have a spec home.

Looking to the future, I can assure you the rest of this year is a dud.
No strike that. Not a dud. This year is a live bunker busting bomb. Even
if sales pick up, there is so much inventory yet to be built in undeveloped
developments, that prices must drop . . . and incentives must go up . . .
and margins will disappear. The alternative? Longer carrying costs, a spike
in SGA and huge impairments. I'd be willing to bet we see negative numbers
by Q4, and worse for Q1 and Q2 of 2008. If you sat in the car with me and
saw what I saw, you'd be scratching your head. I certainly was.

I've got to share this with you. I was on I-95 in and hit what I thought
was the smoke from the fires burning out of control in Florida and Georgia.
It wasn't the smoke. It was actually a dust storm that was being kicked up
from a very large horizontally developed community with no homes. The roads
and utilities were in, but everything else was dirt. And the top soil was
up in the air in a dust storm. I can no longer comprehend how the builders
intend to monetize this land without taking very heavy impairments. I saw
the same thing in all three states.

Orlando Numbers - Even though the Orlando Sun Sentinel and other
papers are now reporting about the strength in the Orlando markets attributable
to a solid tourism market, the numbers show a different story . . . and ground
zero is even worse. By the way, if gasoline continues the march higher, Orlando
takes a heavy hit. I've attached a few files from the Orlando Association
of Realtors. If you want more, I've got them. If you want to discuss the
numbers and ground zero, call me. Here's a summary of April numbers for the
Orlando MSA.

Sales - 1,768 v. 3,018 in 2006 - Sales DOWN 41.42%

Listings - 24,345 v. 16,036 in 2006 - Inventory UP 52.37%

And for those that say it's getting better, Inventory rose 3.77% from March
2006 to April 2007. While the inventory bulge might be slowing, it is still
rising . . . and as you can see from the numbers above, sales are still falling.
The active listings represent a 16.63 month supply in this market based on
current sales.

Lawsuits - Just like I have been on the soap box about impairments
and spillover, I've been talking about lawsuits for more than a year now.
Well, the Wall Street Journal finally caught up with the story this week,
revealing this is a national problem. Unfortunately, it is not limited to
buyers trying to get out of contracts as they would like you to believe.
The sharks are on the scent for predatory lending, mortgage fraud, defective
homes and more. If you haven't seen the WSJ piece, you should pull it from
the online version. As usual, Michael Corkery and Ruth Simon did a great
job . . . even if they are limited with some of the things they can report
on.

Watch for much more on the shark attack. By the way, CBS 60 Minutes called
again this week. They are still trying to put together a feature on mortgage
fraud and predatory lending.

We're providing them with contacts, injured parties and information. 60
Minutes will have a segment on the overall real estate market tonight. But
it is also rear view.

By the way, this is not a builder-only problem. Wells Fargo recently settled
a lawsuit regarding subprime lending. Credit Suisse took a big hit, and other
banks have felt the stomach punch. Looking forward, as the banks are bent
over from the stomach punch, they're going to get the knock out kick in the
teeth.

Spillover - A few weeks ago I mentioned Clarence Otis, CEO of Darden
Restaurants, commented that housing problems are affecting their business.
This week Darden announced the demise of their Smokey Bones chain. They are
going to close and sell the restaurants. And it's not just Darden. Walk into
any furniture store and talk to the sales reps. Do the same at Best Buy and
Circuit City, and ask them about sales of big screen TV's and computers.
Boats, cars, clothing, jewelry and more. The housing ATM is out of money.

Retail Sales - We saw some ominous numbers this week. Housing was
to blame, along with gasoline prices. The housing ATM is out of money.

Foreclosures - Last week I gave it a rest, and this week I'm not so sure
this horse needs to be beaten anymore. However, I think it's important to
reinforce how widespread this problem is. It is a national problem that will
truly not come to a head for another 6-12 months. And then it will hit like
a ton of bricks. Here's a great link to a graphic from the Star Tribune in
Minneapolis on North
Minneapolis Foreclosures. Minneapolis? I don't think you can show me
any part of the country that is not being touched by foreclosures.

And here's the bad news that is going to get much worse. According to Foreclosures.com,
for April 2007 v. April 2006, first notice of foreclosure climbed 127 percent,
and homes going up for sale by auction jumped 164 percent. As the housing
bust spillover spreads through the economy, these numbers will skyrocket.

Oh, yes, one more thing. Most subprime mortgages have an adjustable mortgage
rate and most of these loans were at teaser rates that will double, triple
and quadruple mortgage payments over the next three years . . . even if interest
rates remain stable. If rates rise, the problem goes nuclear. Add to the
increasing mortgage payments . . . falling home prices. Negative equity is
already a reality for millions of homeowners.

Rental Market - I don't follow the REITs but I am at ground zero
when it comes to looking at the rental markets. Even though Wall Street has
been singing the praises of strong rental markets, we've seen the cracks
in the foundation for more than a year. It's the same basic Economics 101.
Too much supply and not enough tenants. Here's a link to a Bloomberg article
called Rents
Peak in Housing Glut

Commercial Space - Last week Barry Sternlicht commented about the
strength of the commercial office space markets. No doubt Barry is one of
the sharpest tacks in the box. I worked for him, and I can tell you first
hand, his mind works like a computer. But you must take his comments at face
value. Barry plays with the big boys in the big markets . . . New York, Chicago,
and Los Angeles, as well as the hot international markets. The office space
market might well be healthy in these markets. He noted the flood of hedge
funds renting huge amounts of space. I just wonder how long that can last,
but that is not my point.

The local commercial markets are not healthy. Once again, get in the car
with me and drive around the areas surrounding the few healthy big-city markets.
You'll see a tremendous amount of vacant office space and retail space. Get
in the car with me and start counting signs for strip centers that are beautiful
. . . but empty. These same markets were overbuilt based on rear view mirror
data for the housing markets. The commercial boys saw the number of homes
going up and decided these areas needed more office and retail space. But
as these residential markets fail, so do the local office and retail space
markets.

One final note on Barry's comments. He noted that the hospitality industry
is now facing a cost of construction problem for new properties. Very true,
so now it is better to buy existing rather than try to build new. That's
something that will certainly play out as Starwood, Hilton and Marriott look
for properties or companies to buy.

Inventory - Up, Up and Away

Land Impairments - If you still buy the Conference Call color that
impairments will not matter, you truly need to spend a few days with me in
the field.

WCI - Needless to say, the Conference Call was a non-event for those
of us looking ahead. We saw a negative number for Tower Net Orders. That
negative number will continue to grow. And since WCI books revenue throughout
sales and construction, this becomes a big problem.

The biggest take-away from the call was the projected and unrealistic 15%
default rate for 2007. They based this on rear view mirror logic. Mosaic
and Singer Island skewed these numbers.

If Mosaic had to close today, the default rate would be 25%+. The ground
zero from Singer Island is not rear view, but colored glasses. The buyers
I spoke with were going to close because they expected to ride the coat tails
of Barry Sternlicht's Starwood. Well, Barry's not there anymore and the Starwood
Vacation Ownership program is one of the most profitable segments of Starwood's
business model. It is not meant to generate revenue for the unit owners.
The benefit to the unit owners is the lower cost of holding a unit they want
to use during a part of the year. So for those folks that think they are
going to generate double digit returns on their Singer Island units . . .
they are in for a surprise.

Another problem at Singer Island for these owners, is the seasonality of
the business. It's a December - March business, and there is a lot of competition
at better rates, in better areas for vacationers. As you can see, WCI's 15%
default rate moving forward is unrealistic. Look for the default rate on
the towers moving forward to average 30%+. Just take a look at Lesina with
only 77 of the 116 units sold, and just 31 of those closing. They've only
sold 66% of the units! How about Lost Key with just 39 of the 70 units sold
and only 20 closed. Here they've only sold 55% of the units.

At Oceanside they've only sold 67% of the units, and I can assure you more
than half of these folks will walk away. Oceanside fails on location and
value. A lot is riding on Bal Harbour. Even with 100% of the units sold,
how do you explain more than a third of these units already on the MLS system
for sale at prices now touching original sales prices . . . with no re-sales?
As prices continue to fall in the Miami market, Bal Harbour fails with a
default rate significantly higher than the 15% WCI projection.

Back to Singer Island for a moment to get some color on what you can expect
at Bal Harbour. Only 12 of the 15 units at One Singer Island have sold. Although
WCI claims to have sold 14, they can't seem to get two of the units to close,
and they could not sell the 15th unit. This is a tower more comparable to
Bal Harbour. They're facing a 20% default/non-closed rate here, and this
was closed almost six months ago. The condo market has darkened considerably
during the last six months, and it will grow much darker moving forward.

The Bright Spots

Florida East Coast - One of my favorite stocks was taken out this
week. Florida East Coast (FLA). Fortress Investment is going to buy FLA for
$84. A hefty 86% spike from it's 52 week low, and a 13.3% premium from the
last quote prior to the offer. This has been a favorite for two reasons.
Very sharp commercial property development, and they are the largest railroad
in Florida. Castro will die, Cuba will open up and FLA will see a huge surge
in rail traffic. The only thing that surprises me about this buyout, is that
Buffet and Gates weren't involved, as they have announced rail purchases
recently.

St. Joe - St. Joe is the largest landowner in Florida with somewhere
around 800,000 acres. For years I have been keen on St. Joe and their potential
. . . if they do it right. Getting into home building was not the brightest
move. On the other hand, following the lead of the Griffin family, owners
of Alico, would have made much more sense.

Alico is another company with large land holdings in undeveloped markets.
Well, undeveloped until the Griffins realized it was smarter to put land
in the hands of others to develop for an airport, university, etc. If you
build it, they will come. And they did. Alico's land holdings are primarily
in Southwest Florida. By nudging along the infrastructure, they were able
to monetize their citrus and cattle land and handsome profits. The problem
for shareholders, was three generations of Griffins. That's changed now,
but so has the real estate market.

As for St. Joe, The New York Times hit the nail on the head this week with
an article about St. Joe and the Florida Panhandle. For those of you that
have been with me for awhile, you know I've said all along, St. Joe needs
to build a destination or a city, not homes. So now, just as Alico did, St.
Joe is offering 4,000 acres of land for an airport expansion. They've also
promised 40,000 acres for preservation. But they need to take it a step further
and bring in a University, a hospital with unique departments, maybe a state
of the art convention center, and a few more bells and whistles to make the
Panhandle something special. St. Joe is facing major hurdles from the environmentalists,
but with 800,000 acres, there's enough for everyone. St. Joe has the ability
to develop something very special in Florida, that has the potential to draw
Baby Boomers, second home owners, convention traffic, tourists, and more.
If they build it (right), they will come. Here's the link to the NY Times
article A
Bid to Bring in the Crowds.

1,000 Donuts - Back in October 2005, I made a statement analogizing
the housing market to the room of 1,000 donuts. You walk in to a room full
of 1,000 warm Krispy Kremes. How many can you eat? Two, three, maybe four.
Any more than that, and you've got a belly-ache. But then they tell you,
the rest of the donuts are marked down 75%. Wow, what a bargain. Can you
eat any more? Not a chance. Can you take them home for later? Not a good
idea. Well, it's the same thing with housing. How many homes can you live
in?

Disclosure: Of the stocks referenced today, I have a put position
in Toll Brothers. I also love Krispy Kreme donuts . . . and I can only eat
two.

The Shadow

Thanks Mike.

Here are links to the ABC and NBC interviews he did in South Carolina this
week. The first one plays nicely and presents Lennar's side of the story as
well. I could not get the second link to play.